‘Unlink’ retirement timing and Social Security

Jeffrey B. Miller is Professor of Economics Emeritus at the University of
Delaware. He earned his doctorate from the University of Pennsylvania in 1976
and taught at the University of Delaware for 36 years. In
2009 he co-founded Social
Security Choices, a firm that specializes in providing customized
information to assist people in formulating their best strategies for claiming
Social Security benefits. Dr Miller worked at Social Security after graduating
from college.
JMiller@socialsecuritychoices.com

We often hear someone close to retirement tell friends and relatives that they are going to “retire and start collecting Social Security” in a single breath, as though the two phenomena are one and the same decision. While it is natural to think of Social Security as a pension that replaces part of the income lost when you leave employment, this does not necessarily mean that retirement and claiming of Social Security benefits should commence at the same time. In fact, there can be real advantages in separating the two.

The decision to retire is multifaceted, with finances being an important consideration, but only one of many. The decision of when to claim Social Security benefits is a financial decision alone. Significant lifetime benefits can be jeopardized by tying the retirement decision too closely to the Social Security claiming decision.

For example, consider a couple where both partners plan to work until 70. If they both wait to claim their Social Security benefits until they are 70, they could lose out on spousal benefits. If one partner has a monthly retirement benefit of $2000, the other partner can receive spousal benefits of $1000 per month beginning at age 66. Those monthly payments will add up to an extra $48,000 over four years. In this case, one partner should claim benefits before retirement.

A more common case concerns the 48% of men and 59% of women aged 62 to 64 who are not working. For these individuals there are large financial advantages to delaying claiming Social Security benefits beyond retirement.

As RetireMentor Manish Malhotra has so persuasively argued, delayed claiming can greatly reduce the risk of not having the desired level of income over 30 years. The free calculator at Social Security Choices can provide a personal assessment of the advantages for a married couple to pursue an optimal strategy instead of claiming at 62.

If you are still working, but contemplating retirement around 62, the advantages of delayed claiming are so large that you may want to plan ahead and save enough if possible so that your family has sufficient financial resources to live comfortably while you and your wife wait to claim benefits. This can provide you with significant income protection as you get older.

A final note on decoupling the work and Social Security claiming decisions: While the decision to retire should not necessarily influence the decision of when to claim Social Security benefits, the reverse is also true. In general, Social Security benefits should not influence the decision of whether or not to work. A misunderstanding of the Social Security earnings test often results in people working less because they think that they will lose benefits if their income is too high. As I have noted in a previous article, the earnings test can frequently be ignored because the benefits lost before you reach full retirement age will result in larger benefits after reaching full retirement age.

The Social Security program was designed to provide people with income in retirement, but the claiming decision is actually a financial decision. Care should be taken to consider all the options before making a claiming decision. Assuming that the timing of retirement and claiming are one in the same can easily result in a very poor financial decision.

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